Is the sky really going to fall?

The banks have been telling all their agents that there is an increase in foreclosures coming.  On the other hand, inventory is very tight as long as you are near fha loan limits ($687,500).  I am curious to know if the expected increase in inventory will be large enough to meet the demand that is out there and cause another slump of sorts or if there is enough demand to handle the coming inventory.

I took a small section of the market that I think extrapolates very well to the San Diego market as a whole.  I looked at 4S Ranch for a number of reasons (for those of you who live here, I am including Bernardo Springs, Bernardo Point, Santa Fe Valley and La Vina with 4S):

• The first home was sold in 2002 and a large number of homes have been built and sold since 2005.  Therefore there are a lot of people with questionable loans and no equity – the recipe for disaster.
• It is a desireable area located within the Poway school district and was designed to be almost a self-contained community with schools, parks, shopping and jobs all within close proximity.
• I am very familiar with the area as it is where I live, the area I sell the most homes, and where I do most of my foreclosure counseling, so I have a pretty good understanding of what is going on in the market.
• The neighborhood has 1 bedroom condos on the low end, and $2M+ homes on the high end, so the full breadth of the market is present and there are 4,000+ homes so the sample size is good.

There are currently 29 homes on the market, 40 in escrow, 37 listed as contingent (short sales waiting for approval) and 60 that have closed in the last 90 days.  This is consistent with the rest of the San Diego market as the number of homes on the market is actually less than the number in escrow (I am going to ignore the contingent listings as it is hard to predict how many will get approved vs go to foreclosure, it is enough to know that if they do not sell now, they will be back on the market as foreclosures).

It is also important to note that several of the builders still marketing homes had slowed or stopped construction in the previous year and are now starting to ramp back up (one builder lost about 15 lots to foreclosure and another has several in default, so these will need to be sold off before building continues on them).
Here is how foreclosures fit into the above numbers:

Total Number               Foreclosures
Active Listings                       29                                  2
Homes in Escrow                   40                                  5
Sold in last 90 days               60                                  5

The total number of foreclosures in the market is running about 10%.

There are currently a total of 17 foreclosed homes (not including the lots above) in 4S Ranch.  Ten of those have not yet hit the market.  Considering that only 12 foreclosures have been sold in 90 days or are currently on the market another 10 is a significant increase over recent levels.  However, it would only represent 2 weeks of sales, so would be unlikely to have a significant impact on the market.

It gets a little more dicey when you look at homes that are currently scheduled for Trustee Sale Auction.  Many of these homes are in the process of loan modification or have been covered by the various moratoriums and have thereby had there sale dates postponed numerous time.  That said, there are 44 homes facing Trustee Sale in the next 30 days within 4S Ranch (data from Realist).   This is a significant number of homes.  If all were to be foreclosed on and put on the market in the next 60 days along with the 10 that are already bank owned, that would be almost three months of inventory added to the market as the we start to slow for the holiday season (only 6 of the 44 homes are currently on the market as Contingent sales).

Stepping back one step farther and looking at homes that have a recorded default against them and that total is 75 (in addition to those facing trustee sale).  This is another three months of inventory.

So, there is the potential for another five months of inventory to hit the market in the next three to six months just from foreclosure activity if the current owners cannot find a way to modify, Re-Write or otherwise stop the foreclosure process.  This is in addition to the inventory that the builders are currently constructing (probably  another 20 – 30 homes over six months) and the normal sales we see in the market.

While I don’t see this as a crisis yet, it is definitely worth watching.  There is a wild-card as also in the market that relates to demand.  The federal first time home buyer credit ($8k) is set to expire at the end of the year.  That has definitely contributed to the pace of purchases over the summer and will contribute to a slow down in demand when it expires.

Taking all of this information together, a few recommendations:

• If you are a small time investor, be careful.  Falling rents combined with what may be another downward turn in the market could be a double whammy (that’s a highly technical term) in the coming year.
• If you are a seller, be aggressive.  With the end of the summer selling season, the expiration of the tax credit and the coming foreclosure inventory, you are likely to get your highest price right now.  Even if it isn’t the price you would like, you might not see it again for 2-4 years if we do take another turn downward.  You have to decide if holding out for an extra $5-$10k is worth the risk of another losing more equity this winter and holding on for another few years.

No, the sky is not falling, but it could resume raining pretty hard for an extended period.

Economics Question

With this post, I am looking for a few responses.  About 200 people pop over to look at my blog from Monday Morning Coffee and a few of you are are in the money management/investment/economics fields.  I am interested in getting your interpretation (or “take” if you prefer) on where we are heading economically because the articles I am reading seem to be telling different stories in the same article.
On August 8th the San Diego Union Tribune ran a New York Times News Service article that seemed to be telling a different story depending on what part you read:

• Headline – “Job numbers hint rebound in the works”
  • Interpretation – Sounds good, the recession might be behind us.
• Sub-headline – “Big loss in July is still the lowest since last summer”
  • Interpretation – Wait a minute.  Last summer was right before the meltdown.  Maybe this isn’t that good.
• Article content – “Employers eliminated 247,000 jobs in July, a huge number by the standards of an ordinary recession, but the smallest monthly loss since last August…”
  • Interpretation – So, we should be happy that the best month of the last year is worse than most bad months in an “ordinary recession” but we still lost almost a quarter of a million jobs so it’s not that we have hit bottom and are starting to add jobs, but we are just losing them at a slower pace.

My question is, what do you think is really happening?  It looks to me like things are getting worse at a slower pace and somebody is trying to say that means we have seen the worst of it when in acuality the hole we have to climb out of keeps getting deeper.
Would love some opinions by people who know – or think they might know a little!

Inventory Level Update

I really probably should write here more than once a month, but I don’t tend to find enough significant that I can’t cover in Monday Morning Coffee, so I tend to only come here for larger posts.  Today, I want to update the post from June 7th that talked about inventory levels in San Diego County.
To recap, in that post, I noted that there were two distinct markets:  Under $600k where loans were easy to get and there was about 2.4 month of inventory (compared to the previous 90 days sales) and Over $1M where loans were difficult and inventory was about 22 months.  I also showed how the drop in inventory at the lower levels was largely a factor of supply and not demand.  Demand was similar to historical levels, but supply was low because of the moratoriums Fannie had put forth on foreclosures.  My theory was that as the foreclosures started to hit the market, the inventory at the lower levels would loosen up – and potentially the glut at the high end would get worse.
Well, the banks have started to slowly release some of the lower end foreclosures, but nothing like the volumes we are expecting (now they are telling us September and October – I’m not sure they have a real good feel for what they have and when they can get it on the market).
Looking at the data as of today:

• Under $600k there are currently 5,174 homes on the market with 7,618 sales in the last 90 days.  This gives us a current inventory of just over 2.0 months, which is a continuing reduction.  The number sold is staying steady, it is again the number of homes offered for sale that is dropping – from 6,219 on June 7 to 5,174 today (Aug 9).  This is once again indicative of the bottleneck at the banks.
• Over $1M there are currently 2445 homes on the market with 335 sold in the last 90 days for an inventory of 22 months.  And those numbers are almost the same as 60 days ago – this market is limping along without much change.

What does it mean?  I think the over $1M market is an example of what the market is without government support.  Under $600k, the demand is being driven by 2 distinct groups:

• First time home buyers taking advantage of the government credit (which expires at the end of the year) and easy FHA loans.
• Investors who are jumping into the market a little bit early (I think it is early because they are buying properties that cash flow today, but there is a real risk of rents continuing to fall dramatically (just ask owners of appartment buildings) which would make these properties unsound investments a year or two from now – but, I could easily be wrong on this).  I am still nervous about this market as the news I hear sounds like the old saying – lipstick on a pig.  If you read the headlines it sounds good, but if you read the story, it sounds bad.

So, quick summary – The market is still overheated in the low to mid levels and very slow at the high end.  The big variable is the banks:  Demand is strong, when will they start releasing their foreclosures?  I think that home owners buying a home they will live in for five years are going to do ok – not too sure about the investors jumping in, there could be some more downside risk.